Breakeven points are one of the mysteries contractors talk about but never get around to calculating. Knowing your breakeven point is a great management tool for your business.
What is your breakeven point? It’s the dollar volume you need to sell each year to cover job costs and overhead expenses. After you reach your breakeven point, all sales from that point on provide the profit. If you don’t reach your breakeven point, your business will lose money. If you only reach breakeven and don’t go beyond, your business won’t lose money, but won’t show any profit.
To calculate your breakeven point, you need to start with your gross margin.
“What? Hold it, Stone. You have lectured us for years about staying away from margins.” You’re right, I have. New chapter, someone taught this old dog a new trick. Our work with ElkCorp, a roofing and building product manufacturer, has shown me the need to address margins on occasion. Calculating your breakeven point is one.
Earlier this year, we discussed the difference between markup and margins. Markup is the factor multiplied by job costs to arrive at the sales price for a job or service. Gross margin is your overhead and profit as a percentage of the total revenue (sales). Stay with me.
To calculate your gross margin, calculate total sales (either based on the past year, or your projections for this year). Then calculate all overhead expenses and profit. Here is an example:
Total Sales (sold, built, and collected): $275,000
Job Costs: $183,565
Overhead expense: $69,435
Net profit at 8 percent
Total overhead and profit: $91,435 (also known as gross profit)
Gross Profit ? Total Sales = Gross Margin
$91,435 ? $275,000 = 33.25 percent
Our gross margin is 33.25 percent.
(Note: Using these figures, our markup would be 1.5. Markup is calculated by dividing total sales of $275,000 by the job costs of $183,565. To check your markup calculation, multiply $183,565 by 1.5 and you’ll get $275,000.)
To calculate the breakeven point, divide overhead by the gross margin.
Overhead ? Gross Margin = Breakeven
$69,435 ? .3325 = $208,827
When we have sold, built, and collected $208,827, we have reached the point where our sales have paid all overhead expenses, and that is breakeven. How do we know? $208,827 will have $139,218 in job costs ($139,218 times 1.5 = $208,827), and a gross profit of $69,609. Our overhead expense is $69,435!
Technically every dollar in the door (minus job costs) after reaching breakeven is pure profit for your business. What is clear is that the sooner you get to breakeven, the sooner you have paid your overhead and can start making a profit.
If you will put out the effort to know and do the math, you’ll know what you need to do and when, putting your business on a more solid footing.
Michael Stone is a business coach and consultant with more than three decades of experience in the construction industry. He wrote the book Markup and Profit: A Contractor’s Guide, published by Craftsman Book Co. For Michael’s free newsletter, sign up at www.markupandprofit.com. Michael also is an experienced speaker and is available to speak at conventions and workshops. He can be reached by e-mail at email@example.com, by phone at 888-944-0044, or on the Web at www.markupandprofit.com.